Question

Noda Enterprises manufactures and sells study guides for learners at schools. The selling price of each study guide is R120. The company’s current output is 6 000 units per month, which represents 75% of the company’s production capacity of 8 000 units. The Gauteng Department of Education offered to buy 2 000 study guides as a special order at R70 each to provide to indigent learners. Fixed costs for the month amount to R210 000 and variable costs amount to R366 000.

1.1 Study the information given above and advise Noda Enterprises whether they should accept the special order or not. Motivate your answer with the relevant calculations.

Answer 1

Variable cost of producing 6,000 units = R366,000

Hence, variable cost per unit = 366,000/6,000

= R61

Analysis of special order

	Status quo	Alternate: Accept special order	Increase/or decrease in income
Sales	6,000 x 120 = 720,000	720,000 + 2,000 x 70 = 860,000	140,000
Variable costs	6,000 x 61 = - 366,000	8,000 x 61 = - 488,000	- 122,000
Fixed costs	- 210,000	- 210,000	0
Net operating income	144,000	162,000	18,000

Noda Enterprises should accept the special order since special order will increase net operating income by R18,000

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